Strategy and the Value Proposition
Andrew McKinna, January 2017
The holiday period is a great time to think. Quiet, no distractions, no pre-christmas rush. If it’s not done now, it’s not happening, there is time to think.
And so, given the time, my thoughts turned to Strategy and the Value Proposition. What got me to that point was passing a former competitors truck, that had a new livery, stating its (I assume) positioning statement, which was completely illogical. Big, expansive, imposing, but irrelevant. If it wasn’t a positioning statement, then it was without purpose, so lets give them the benefit of the doubt. A positioning statement should be a distillation of the company strategy. It should state in a 3 second (motorway billboard readable) sentence what you offer. Why someone should choose your brand. Audi, "Advancement through Technology”., Qantas, “The Spirit of Australia”, Mercedes, “The Best or Nothing”…etc Without stating the company’s name in my observation above, it in essence was stating it was “the future” in its given field. Really? This company doesn’t have a unique business model. Like its’ competitors, it does the same things in much the same way.
I recall (a very long time ago) the example used at uni, of car rental companies. Hertz, “Number 1”, Budget, “drives your dollar further”. Avis, “we try harder”. All of these positioning statements explain to the potential customer why they should choose that particular supplier. At the time Hertz was number 1, they offered the greatest range in the greatest number of locations. Avis however was second, and no body wants to go with second best, so why choose Avis? “We Try Harder” explains to the consumer why they should choose Avis, and Avis made their differentiation strategy all about service and having a better customer experience. Bob Ansett’s Budget car rental was relatively new at the time and took the cost leadership position, and told you up front in both its name and positioning statement “driving you dollar further”.
And so, with those things in mind, what is your company strategy, what is your value proposition, why would a customer choose your product? If it’s the same as everyone else’s, they will surely just choose the cheapest. Your strategic decision becomes, ‘how quickly are we willing to go broke”.
In 1980 Michael Porter (Harvard Business School) put forward his Generic Strategies idea. He proposed that there were 3 generic strategies a business could follow. (Industry wide) Differentiation, and Overall Cost Leadership, and (targeted to segment specific ) a Focus Strategy. He also wrote widely on competition, and understanding what business you are in. The example that comes to mind is that of a drill manufacturer. People don’t buy drills because they want to own a drill. They buy a drill because they want to own a hole. And so, the drill manufacturer is in the hole making business, not the drill making business. He is competing with any means of producing a hole, not just other drill manufacturers. Coca-Cola is often heard to define its market as “share of throat”, not just the cola market, or soft drink market. They recognise they are selling a drinkable liquid, and could be competing with bottled or tap water, milk, juice, beer, coffee etc.
The other important distinction to make is that of “technology employed”. The printing industry is a great example of that. Ask most printers what business they are in, and they’ll tell you they are in the printing industry. Yet printing is just the technology they employ. The majority of commercial printers in years gone by were in fact in the advertising business. They produced advertising material, flyers, pamphlets, catalogues, and the like. When cheap access to digital printing and digital advertising came about, most of these commercial printers closed the doors. The need for advertising still existed within their clients, but their clients were now either printing on demand in their own offices, or spending their money on-line. The demand for the printing technology had all but dried up, but the basic need continued. If you are simply employing a technology, you are open to disruption.
The starting point to developing strategy and a value proposition is to understand what basic need you are satisfying, from that decide what business you are in, then what strategy you will employ to compete in satisfying that basic need, which delivers us neatly to determine the Value Proposition.
In its basic form the Value Proposition is simply the value obtained by the purchaser for the price paid. This is were competition happens. What can be offered for how much compared to the competitors offer. By deciding on the basic need you are satisfying, and your generic strategy, you will have an enduring business, but your value proposition (your product strategy and distribution strategy) needs adapt to changing market forces, competition. In a hotel, it is not just be the size of the room, or quality of the fittings, but also the location of the hotel. For a component supplier (say ingredients, packaging or auto parts), the quality systems employed, the redundancy within the suppliers manufacturing or supply chain, its exposure to risk, or its ability to recover from disaster to maintain supply all impact the value proposition.
Choosing the Overall Cost leadership position is a simple concept to grasp. You commit to have the lowest cost service delivery mechanism ( e.g. manufacturing efficiency, best buying strategy, warehouse or logistic solution, most basic hotel room, or aeroplane seat mile), which can then be offered at the lowest price in the market. That is not to say lowest margin. Margin needs to be maintained, by matching low price to low cost. Low cost does not mean old depreciated equipment which is less efficient. It can mean high capital investment that provides the most efficient tools to perform the task. Low cost airlines have to run the newest most fuel efficient aircraft to achieve the lowest overall cost. They also need to have the lowest cost booking systems, check in systems, and actively discourage baggage handling costs and food and beverage costs, and minimise departure delays with early check in close off times. Not a great customer experience, but you are getting what you pay for.
Most organisations will choose to differentiate themselves, or have a focus strategy. Differentiation adds cost, but of course the objective is to add more value than cost to maximise margin and profit. A cost focus or differentiated focus strategy strives to offer the best cost and price, or best added value to appeal to specific niche market, whether that niche be a geographically or consumer type segment focused strategy.
Working to the rule of threes, I challenge you to write down 3 unique reasons why your target customer should choose your product over your competitor, then put a value on those benefits in the eyes of the customer, and see if it adds up to the difference in the price and the hassle of changing suppliers. Try putting together an EVA (Economic Value Add) equation for the business you are evaluating versus the offer you are presenting/considering, and see if the offer stacks up. If you have a reasonable understanding of the market factors in your segment, between you and a few experienced colleagues, you’ll come very close to a good guesstimate of the costs and benefits.
Of course changing suppliers has a cost, and modern procurement professionals have become very adept at getting the price they need for the service level they want. The challenge for the sales professional is to sell the value they are offering. In a B2B relationship, most customers don’t want to change suppliers. It involves hassle, and risk, and cost. If you’re a sales professional trying to win an account, you not only have to have a value proposition to beat your competitor, or provide more value to your customer. It has to be good enough to “buy out” the relationship equity the incumbent supplier has, (unless the customer wants to leave the relationship they have). Like politics, its often the incumbent that looses the business, more than the protagonist wins, provided your value proposition stacks up.
Sometimes you win. sometimes you loose, but if your strategy and value proposition don’t deliver a more positive cost benefit outcome, you’re not in the running.